Earnings Call Transcript - TTE Q4 2024

Operator, Operator

Good afternoon, good morning, if you’re connecting from the U.S. Welcome to TotalEnergies 2024 Results and 2025 Objectives Meeting. We are today in London. I hope that you will appreciate that we brought the sun to London today, and you will appreciate the view as well. For those who want to follow us live, you can connect on our website, totalenergies.com. The program today will start with the presentation of the 2024 results with Jean-Pierre, and then we will move to the outlook presentation for 2025 with Patrick. The presentation should last one hour. After that, we will move to the Q&A session, so you will, of course, be able to ask any questions you want. We have, as usual, a dedicated line for those who could not attend, and we will bring online questions from time to time. We should finish around 04:15 to 4:30. But before we start our journey today, I invite Stephane Michel, our President of Gas and Power, to come on stage to launch the meeting with a sequence on safety. Stephane?

Stephane Michel, President, Gas and Power

Thank you, Renaud. Good afternoon, everyone. As you are aware, TotalEnergies is building an integrated power pillar. And like any other industrial activity, this new development comes with new HSE risks. One of them is the risk of fire and explosion while operating our battery energy storage system or BESS. In the industry, around 15 incidents happen every year, and the most serious one was in March in Japan, where several firefighters were injured by an explosion. Within TotalEnergies, our last incident occurred in 2023, hopefully without injuries. But since then, we have worked on the design specifications of batteries. We have done so with our battery affiliate, Saft, which happens to be one of the top five suppliers in the world. Thanks to their knowledge, we’ve been able to include new innovative safety barriers that you can see on the slide by adding early detection of thermal runaway to prevent the fire from spreading, by adding a water fire suppression system in addition to the passive ones, and by adding extra ventilation to avoid the risk of explosion. We are now systematically implementing dedicated training for firefighters on how to fight a battery fire because it’s quite specific. Thanks to all that, we are confident that we can develop our multi-gigawatt pipeline of batteries while protecting our people, of course, and by limiting the risk to our assets. Thank you.

Operator, Operator

Jean-Pierre? While Jean-Pierre will be on stage, you have the first one.

Stephane Michel, President, Gas and Power

Okay. On safety, sorry. That was for the battery, and that’s a good transition for our results in 2024. The first one is on the results compared to our peers. As you can see on the left side of the chart, the fact that we are continuing to progress means that we are actually in the lower, if not the best, part of our peers in terms of comparison. That’s one on the left part of our activity. And then you have the right part of our activity, where we have introduced the comparison as well on integrated power peers, comparing our results to those of the peers in that industry. You can see that we have been able to progress from above 1-1.5 in terms of trailing in 2020 to 0.78. That’s very much at the leading edge of what is achieved in the integrated power industry, realized by working on technological risk, as I just mentioned in the previous slide, and also working on behavioral safety regarding two key aspects; one, the way we operate our facilities, and second, the way we build because we have huge exposure to construction work. That was for safety. Thank you. Jean-Pierre?

Patrick Pouyanné, CEO

I should introduce in the room because you have all the executive committee members; you can identify them. Nicolas is just there, Nicolas Terraz, Vincent from Refining and Chemicals, Bernard is next to Renaud, and we have in the back Aurelien and Namita. I think I did not forget anybody. Helle is in Japan, so she’s not in London, but she is probably listening to us. So, Jean-Pierre, the floor is yours now.

Jean-Pierre Sbraire, CFO

Thank you very much. It's a real pleasure to be here today to present the 2024 results and the main achievements of the year. As you know, our balanced and consistent strategy is anchored in two pillars: oil and gas, mainly LNG, on one side, and integrated power on the other side. We have made great progress in 2024 executing this strategy and anchoring free cash flow growth on both pillars: oil and gas and integrated power. Let’s start with the key highlights of the year 2024. On the oil and gas pillar, we started production at five major projects: Mero 2 and Mero 3 in Brazil, deep offshore Brazil, Akpo West in Nigeria, Anchor in the Gulf of Mexico in the U.S. and Fenix in Argentina. We launched four major oil projects: GranMorgu in Suriname, Atapu 2 and Sepia 2, two more offshore projects in Brazil, and Kaminho in Angola. We progressed in Namibia where we are working towards sanctioning the first oil development, which Patrick will give you more details about later. In the LNG business, we further derisked our exposure to spot gas prices following the strategy we presented to you during the CMD in New York in October. That means we continue to successfully market our LNG volumes by signing several new mid-term contracts with Azerbaijan, representing in 2024 more than 6 million tons a year, mostly with an oil indexation. Secondly, we increased upstream gas integration in the U.S. by acquiring an interest in dry gas assets in the Eagle Ford play in Texas. We also launched the Marsa LNG project in Oman and became a significant gas operator in Malaysia through the acquisition of 100% of SapuraOMV, providing us LNG pricing exposure and a platform for future low-cost, low-carbon growth in production. So, in summary, on this first pillar of oil and gas, we anchored our upstream production growth forecast of 3% per year through 2030 in a cash-accretive way. We also recorded an approved reserve replacement ratio above 150%, one of the records in TotalEnergies' history. Moving now to the second pillar, Integrated Power. We were very active in 2024 in that business as well. You see on the slide some of the achievements of the year, the main highlights of the year. I will come back on that later. But importantly, we reached our cash flow targets to have a cash flow from operations above 2.5%. We are at 2.6% in 2024. I think it’s a very good achievement. In a softer price environment compared to the previous year, 2023, we generated almost $30 billion, $29.9 billion of FFO, coming from all the different businesses. The repetition of this cash flow generation is segment by segment. E&P contributed significantly to this performance, with cash flow generated in 2024 at $17 million, benefiting from the oil project startup I already mentioned in my introduction. Integrated LNG business performed with a cash flow at $4.9 million. It was negatively impacted by lower average LNG prices compared to the previous year, low market volatility during the first three quarters of the year that impacted gas trading results. But on the positive side, the Q4 results showed LNG trading performance back to the level of the first quarter of 2023. Integrated Power continued its track record of strong performance through the year with high cash flow year over year, $2.6 billion in 2024. Downstream cash flow reflects the global weak margin environment, especially in Europe, with refining margins down almost 45% year over year after the two exceptional years we benefited from in 2022 and 2023 linked to the Russian crisis. We also suffered from operational issues at some of our refineries, especially in France and the U.S. However, you can see that the downstream cash flow remained robust at $6.1 million, demonstrating the resilience of the Company’s integrated downstream model. Let’s move to the results themselves. We posted adjusted net income at $18.3 billion and IFRS results at $15.8 billion, taking into account mostly impairments recorded during the year on SunPower and the exit from some exploration leases in South Africa, fair adjustments, and inventory valuation effects. Profitability, we had ROE at 15.8% and ROACE at 14.8% in 2024, making TotalEnergies once again the number one in ROACE among our peers. In terms of investments, we invested $15.8 billion. It’s within the range we provided between $17 billion and $18 billion. On the shareholder return side, we raised dividends with a distribution of $7.4 billion in 2024. We executed the $2 billion buyback program per quarter, leading to a total of $8 billion in buybacks for all the quarters of 2024. Overall, payouts for 2024 reached 50%. Important to note that this attractive shareholder distribution was achieved while keeping a very strong balance sheet. The gearing at year-end was 8.3% or around 9.5% when normalized. Why? Because this figure of 3.8% benefited from positive impacts in working capital of $1.5 billion. In summary, we maintained a fortress balance sheet while increasing shareholder returns in 2024. On the investment side, we remain disciplined in 2024 as evidenced by net investments being within guidance of $17 million to $18 million at $18.8 million. We continue to be highly selective in the projects we sanction or invest in, focusing on low-cost, high-return, low-emission projects. TotalEnergies has a balanced growth strategy with one-third of the 2024 CapEx allocated to new oil and gas projects and $4.8 billion to low-carbon energy, mainly renewables, and integrated power projects for $4 billion. We continue to actively manage our portfolio using selective M&A to enhance and aggregate our overall portfolio. 2024 net CapEx consisted of $16.4 billion of organic CapEx but also included $4.6 billion in acquisitions and $3.2 billion in divestments. I previously described our acquisition focus on the upstream side, and it's important to highlight that our Integrated Power acquisitions are geared towards key deregulated markets, including the U.S., the U.K., and Germany. In 2024, we had divestments in upstream, which included our exit from Brunei, the sale of our E&P subsidiaries in Brunei, as well as in downstream, the completion of the second part of the deal with Couche Tard, selling retail stations in Belgium, the Netherlands, and Luxembourg. Within Integrated Power, several divestments were made in line with our strategy to fund projects at COD when production is ready to start. For example, we closed a solar and battery project in the U.S. last December and a 50% interest in Seagreen projects offshore wind in the U.K. Each of the business segments in more detail. 2024 showcased the depth of our upstream portfolio full of attractive growth opportunities that are translating into project sanctions, delivering high returns and robust reserve replacements. You see here the list of the main projects we sanctioned in 2024. Four main projects on the oil side and two on the gas and LNG sides. These projects anchor 3% annual production growth through 2030. It’s important to notice that we have already de-risked project costs by signing long-term lump-sum EPC contracts on these projects. The chart highlights TotalEnergies' compelling investment case. We already have the resources to grow underlying production and cash flow, and they ultimately support dividend growth and attractive shareholder returns. To put it differently, we do not need large acquisitions to fill any potential gap. Given our consistent strategy, we will continue to explore and develop the upstream business. We have maintained a strong and consistent proved reserve life index of around 12 years since 2018. You see here the reserve index for 2024 at 12.4 years compared to 11.7 the year before. It contrasts clearly with some of our peers experiencing declines. Exxon and TotalEnergies lead the peer group by a wide margin in terms of portfolio longevity, providing key advantages in depletion and supporting cash flow into the next decade. You also have the figure for proved and probable reserves now at €8.5 billion. In 2024, our reserve replacement ratio was a robust 157% of production, up from an already strong figure of 141% in 2023. The vast majority was achieved through organic growth, correlating with a strong organic reserve replacement ratio of 150%. These figures demonstrate the depth of our portfolio and our success in replenishing it year after year. Now, let’s discuss integrated LNG. As shown in the chart, the results by the end of the year benefited from improved market conditions in the fourth quarter as adjusted operating income increased 35% sequentially. We are back to first quarter 2023-levels at over $1.4 billion. This performance came from a 6% increase in hydrocarbon production for LNG, above $10 per Mbtu average LNG price, alongside strong trading results that managed to seize market volatility. Despite the rebound in Q4, annual results for 2024 were negatively affected by low gas price volatility due to the mild winter, high stock levels, particularly at the beginning of the year, low demand, and limited trading opportunities in a globally balanced LNG market. So what are our expectations for 2025? As you can see in the top left chart, a colder winter in ‘24-‘25 and low end-of-season storage levels are expected; additionally, the end of the Russian-Ukrainian transit agreement will contribute to tightening the market further. Tightness in Europe should lead to more competition between Europe and Asia to attract energy vessels and result in increased arbitrage opportunities for flexible cargoes between the U.S. and both Europe and Asia. This should benefit TotalEnergies due to our dominant position in the U.S. and large footprint as an energy exporter. Moving now to Integrated Power business. 2024 was a continuation of our multi-year track record in that business. This is a definitely growing segment. Between 2021 and 2024, we have grown Integrated Power to yield strong results. Our cash flow has increased nearly four times in that timeframe, reaching again our target of cash flow above 2.5 billion in 2024 with ROACE increasing from 7% to 10%, which was the target we set for the year. We further enhanced our integration in regulated markets through flexible asset acquisitions. We acquired CCGT in the U.S. And in the UK this year for 3 gigawatts. Additionally, we increased our storage capacity through the acquisition of a major player in the German battery market called Kyon in the middle of the year. We have also been active in consolidating our renewable portfolio. As part of our fund down strategy in Integrated Power that I mentioned in my introduction, we successfully funded down the equivalent of 1.2 gigawatts of renewable and battery projects, resulting in $1 billion of CapEx being recycled with over 10% returns. Furthermore, we acquired VSB, a German-based renewable project developer with an 18-gigawatt pipeline mainly in Germany, France, and Poland, with the closing expected this year. In 2024, we also strengthened our differentiated market offering of Clean Firm Power. Through our relationships, we captured premium pricing for supplying 3 terawatts of Clean Firm Power to large industrial and big tech companies. Notably, operational Scope 1 and 2 emissions are down 36% compared to 2015. On an absolute level, our Scope 1 and 2 emissions in 2024 were at 34 million tons compared to our target of being under 38.8 million tons of CO2. Reflecting year-on-year trends, we observe two opposite movements: on one hand, a decline in emissions from our oil and gas operations through emission reduction initiatives undertaken over the last few years; on the other hand, the impact of new CCGT acquisitions, particularly in the U.S. and the UK. Regarding methane, our target to reduce operational methane emissions by 50% from 2020 levels has been achieved a year early, with operating methane emissions in 2024 now down 55%. This was accomplished thanks to continuous decreases in flaring and CO2 emissions, particularly in exploration and production. For instance, in Gabon, the elimination of hot flaring was completed two years earlier than anticipated. We will continue to reduce methane emissions with a new objective set for 2025, targeting a 60% reduction compared to 2020. To achieve this, multiple actions will be executed, including the deployment of continuous detection systems across our operated assets, which will involve developing and deploying over 13,000 pieces of equipment for continuous monitoring. Additional technological improvements will also be implemented to further reduce methane emissions, including switching gas instrumentation and replacing fair tips. Lastly, we reduced our lifecycle carbon intensity by 17% compared to 2015, surpassing our initial target of 14%. This indicator reflects the amount of CO2 emitted per unit of energy sold and signifies the evolution of our energy mix and the implementation of our strategy of providing more energy with fewer emissions. The final slide for this section benchmarks TotalEnergies' performance against peers on four important metrics: proved reserve life index, upstream production cost, ROACE, and dividend per share growth. Our strategy remains consistent, allowing us to deliver results while staying competitively positioned. The proved reserve life index increased from 11.7 years in 2023 to a robust 20.4 years in 2024, putting us on par with ExxonMobil and ahead of other peers, demonstrating the depth of our portfolio. We have the resources in place to continue growing production and cash flow, ultimately supporting dividend growth shortly. As mentioned, we are not a shrinking company; in fact, we are replacing reserves, at a much faster rate than we are depleting them, outpacing several of our peers. In 2024, we achieved a strong reserve replacement ratio of 157%, demonstrating our value generation and growth potential. Next, let’s discuss integrated LNG. As shown in the chart at year-end 2024, the results benefited from improved market conditions, leading to higher adjusted net operating income, 35% sequentially. The performance is largely driven by a 6% increase in hydrocarbon production for LNG, along with prices averaging above $10 per Mbtu. Subsequent strong trading results were able to capture higher volatility, significantly improving metrics compared to previous quarters. Overall, despite this, we note that we faced challenges in 2024 with gas trading results—particularly during the first three quarters—owing to low gas price volatility driven by a mild winter and overly stocked inventory levels at the start of the year. For 2025, we anticipate a colder winter and already lower end-of-season inventory levels, which should lead to tightening the market further and resulting in increased competition and arbitrage opportunities between Europe and Asia regarding LNG dispatches. Our robust regional dominance in the U.S. will help us capture additional value opportunities. In summary, we are confident in the overall outlook and foresee strong ongoing demand.

Patrick Pouyanné, CEO

Thank you, Jean-Pierre, for this introduction. Market conditions for 2024 were robust, and we entered a new era with our balance sheet fully deleveraged, enabling us to carry out our strategy. In 2025, our intention is to grow while delivering additional free cash flows, which remain a priority for us. Therefore, you will see a focus on active growth and resilient shareholder returns in our program for 2025. Regarding market conditions, we have observed a flat oil market, with demand rising significantly as COVID recovery phases continue in China. In terms of supply, we expect OPEC+ to maintain price levels above $70 to $75 per barrel, responding well to overall crude demand dynamics. On the gas side, the 2024 market was characterized by low seasonality due to a milder winter, resulting in high inventory levels. While pricing remains high for gas, we anticipate increased volatility and tensions with inventory replenishment leading into 2025, which may impact pricing positively. Our organizational insight leads us to expect tightening in both Europe and Asia as demand increases. Looking ahead, we have KPIs for 2025 in place. Our forecast indicates a 5% growth rate driven by increased production of oil, gas, and electricity. Our anticipated supply growth is set at 3% for oil and gas while targeting over 20% growth within the electricity segment, aiming for over 50 terawatt-hours by the end of 2025. 2025 factored targets exemplify our commitment to transitioning to low-carbon solutions while maintaining critical hydrocarbon production.

Stephane Michel, President, Gas and Power

In terms of growth drivers, we aim to establish a balanced portfolio that achieves low emissions while enhancing production capacity, contributing meaningfully to meeting net-zero emissions by 2030. It is pertinent that, at the end of this year, we will be able to maintain a focus on achieving our goals regarding Scope 1 and 2 emissions, and we have a target of less than 37 million tons of CO2 emitted. All of our initiatives regarding methane reduction and carbon intensity also contribute to those goals.

Patrick Pouyanné, CEO

On the capital allocation front, we aim to maintain CapEx within the $17 billion to $17.5 billion range, which will encompass both organic and necessary investments. Guidance remains unchanged, and I will confirm our continued pursuit of a shareholder return strategy by managing buybacks according to normalized cash flows. Our ongoing operations focus on delivering value-driven growth as our ultimate target.

Henry Tarr, Analyst

Hi. Thanks for taking my question. It’s Henry Tarr at Berenberg. I have a couple of them. In Namibia, I think you mentioned Tamboti perhaps not living up to expectations. If you could give a bit more color on that, that would be great. And also, on the LNG business, could you discuss what flexibility you have this year regarding the cargoes that are available to drive incremental cash flow from integrated LNG?

Patrick Pouyanné, CEO

Okay. Tamboti, Nicolas, do you want to answer? You need to take a microphone, or otherwise, nobody will listen to you.

Nicolas Terraz, Executive Committee Member

So, Tamboti had oil pool issues. We performed a test of the well. The permeability was lower than Venus. So, basically, the well did flow, but the flow was limited.

Patrick Pouyanné, CEO

But to be clear, there is no commerciality; we cannot think of connecting Tamboti to Venus. The game is over on Tamboti. We knew this was a risk, as during one of the drilling campaigns of the Venus appraisal, we observed some degradation to the north. However, we drilled it because it was a sizable prospect, so we wanted to explore the opportunity. But we are focusing on the remaining sections of the block. Now, regarding the liquidity in the LNG portfolio, Stephane?

Stephane Michel, President, Gas and Power

Yes. So, the flexibility we have in the portfolio predominantly stems from our supplies coming from the U.S. Those U.S. volumes can be directed towards Europe or Asia. As Patrick mentioned, the spread between GKM and TTF should be quite volatile owing to low stock levels in Europe. We expect increased competition for that LNG; hence, we will have the ability to redirect cargoes based on which market provides the best opportunity.

Patrick Pouyanné, CEO

When we have a long-term contract, we are generally able to divert the cargoes with some profit-sharing, which is a key strength of our portfolio. We have significant gas capacities in Europe as well, and the infrastructure is ready to support this.

Michele Della Vigna, Analyst

Michele Della Vigna from Goldman Sachs. Two quick questions, if I may. The first is regarding tariffs, which has recently become a hot topic. Given your exposure across various parts of the U.S. energy value chain—specifically renewables and LNG plants—do you see potential areas where tariffs could be inflationary from a CapEx perspective?

Patrick Pouyanné, CEO

On the second front, yes. I think there is concern regarding the summer in Europe, with potential negotiations requiring Germany to achieve 90% inventories by the end of summer. Do you believe the market can achieve that, or do you foresee a repeat of 2022 with fierce competition on prices with Asia? On the second inquiry, I think it’s clear that we all should maintain healthy storage levels while transitioning to recovery from last summer. The current situation with more free gas terminals implies that the urgent pressure for storage is reduced compared to 2022. However, if we act too aggressively in replenishing storage, we may stimulate increased competition that could fuel inflation. I do see risks associated with this situation moving forward. Regarding tariffs, you raise a valid point. We are entering a new world of tariffs, impacting various supply chains. I believe there will be some adverse effects in our industry, but the pragmatism of U.S. administration could likely yield more favorable conditions for business over time.

Martijn Rats, Analyst

This is Martijn Rats from Morgan Stanley. I have two questions, if I may. I wanted to ask about Suriname. In a recent bond offering, the CapEx suggested for the project was perhaps higher than general expectations. Do you have any comments on that? Additionally, can you elaborate on how trading earnings have evolved and your broader ambitions in that business moving forward?

Patrick Pouyanné, CEO

I don’t know where the $10.5 billion budget is. We mentioned that in September, there is no change at all. There is no impact; we are closely monitoring it. Trading has stabilized; while it was a strong contributor overall, we’ve seen declines in earnings due to flat market conditions. The $10 billion trading performance remains exceptional with enhanced profitability.

Biraj Borkhataria, Analyst

Thanks for taking my question. I have one for Stephane regarding integrated power. There’s a clear surge in demand for power associated with data centers; could you provide insights into customers’ expectations, particularly by region?

Patrick Pouyanné, CEO

Our business model is designed around the synergy between renewable and flexible assets. The Clean Firm Power strategy has gained traction, as we aim to offer reliable electricity to customers while ensuring competitive pricing and volume.

Stephane Michel, President, Gas and Power

In the U.S., we observe significant demand growth in Texas. For instance, utilizing our storage capacity enables us to meet customer needs effectively. We also see emerging interest in Germany as we develop our presence there.

Chris Kuplent, Analyst

I have two questions, if I may, regarding capital allocation. With organic growth a priority for you, where do you see the most attractive opportunities in the M&A market considering your ambitions toward 2030?

Patrick Pouyanné, CEO

I don’t need M&A. We have ample organic growth opportunities, evident through significant divestments planned for $70-$80 per barrel. We plan to focus on synergies within existing operations in U.S. shale gas to further replenish our portfolio. On Mozambique, I recently met with the President and noted the strong continuity of security setup for our LNG projects. We feel secure regarding project progress and financing, which remains focused on critical developments.

Lydia Rainforth, Analyst

Thank you. I have two questions. First, on CapEx; could you clarify what drove the reduction from $18 billion to $17.5 billion? And is there a link with contractor-led lump-sum agreements that you could sustain going forward?

Patrick Pouyanné, CEO

The adjustment is primarily voluntary, reflecting focus on effective capital allocation and workforce safety. We honestly want to optimize available resources for ongoing projects. Trust in management decisions will contribute best to future performance.

Vincent Stoquart, Executive Committee Member

We have executed a clear plan on refining availability and are enhancing overall refinery management to capture best operational practices, ultimately aiming for better efficiency and performance.

Patrick Pouyanné, CEO

To summarize, we’re moving towards measurable results from ongoing initiatives while continually adjusting and responding to market demands. TotalEnergies remains focused on long-term growth, resilience, and shareholder return strategies.

Paul Cheng, Analyst

Can you share your thoughts on AI adoption and its relevance to your cost management and efficiency improvement initiatives? Where do you see the most opportunities, and how much of your investments are being directed toward this?

Patrick Pouyanné, CEO

AI adoption represents a crucial factor in driving efficiency improvements. We’re committed to developing a specialized team under OneTech, focusing on integrating AI and digital initiatives across our operations to enhance performance. In the U.S., I recognize concerns regarding renewable support under the current administration. We believe that the bipartisan landscape will afford us opportunities to continue investing in both offshore and upstream projects.

Operator, Operator

Thank you everyone for participating in this earnings call. We appreciate your interest in TotalEnergies and look forward to engaging with you again at our next scheduled event.